401K 1099-R Distribution

Forum|Forum|3 years ago
March 17, 2023
2 replies
34 views

Hello,

I have a 401K loan and when I left my employer I stopped paying on it because my payments were no longer coming out. I got my old job back but I didn't continue my payments. My loan defaulted and I received a 1099-R form in the mail to use when filing my taxes which to me means that my loan was now considered a distribution from my account. Am I correct in thinking this? Since the entire loan amount was taxed and I paid the taxes and penalty on my tax return using the 1099-R, wouldn't this wipe out my loan and it would no longer need to be paid being that it was now considered additional income?

Thanks,

Ryan

Not A Product Question

MaryK4

Level 15

Yes, if you received the 1099-R, it means your outstanding loan balance became a distribution so you no longer have payments to make.

A loan that is in default is generally treated as a taxable distribution from the plan of the entire outstanding balance of the loan (a “deemed distribution”).

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dmertz

Level 15

Because the loan was current prior to leaving the company, the loan should have been satisfied with an offset distribution, reported with code M in box 7 of the Form 1099-R, not a deemed distribution (code L). You have until the due date of your 2022 tax return, including extensions, to come up with the funds a complete a rollover to an IRA or another qualified retirement account of an offset distribution and continue to defer taxes on these funds. An offset distribution is not a default of the loan.

If the Form 1099-R has code L, I would contact the plan to find out why they did not process this as an offset distribution. A deemed distribution does not satisfy the loan and the loan still must be repaid, but any repayments become after-tax basis in the 401(k).